Effects of Demonetization: Evidence from 28 Slum Neighborhoods in Mumbai

University of Washington - Michael G. Foster School of Business; CESifo

Date Written: January 7, 2017

Abstract

We survey about 200 families living in 28 slum or lower-income neighbourhoods in Mumbai in early December of 2016 to document and examine the immediate and short-term impact of the November 8, 2016, demonetization decision by the Indian government. The survey elicits changes in families’ income, expenditure, and savings following the policy announcement as well as possible longer-run effects and a subjective assessment of the policy at the beginning of December 2016. We find that the policy led to a drop in income, with an average drop in income during the month of November of about 10% of families’ monthly income. The effect varies significantly across different groups, in particular between those receiving a regular salary and those not. The income drop is associated with a drop in consumption as well as changes in families’ savings in November. We document a significant difference between past savings behaviour and expected future savings behaviour, with the expected use of bank accounts increasing and the expected use of cash as a storage of value decreasing substantially. Finally, we find that the majority of respondents view the policy overall as positive, including the majority of those that experienced some loss of income in November.

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